GVA should expand by 0.7% over the course of 2024, slightly below the UK average of 0.9%. Scotland’s growth is expected to pick up in 2025 (1.3%) and 2026 (1.4%). However, the forecast is weaker than last quarter, with Scotland continuing to lag UK growth over the forecast period.

Scotland’s economic growth in the first half of this year was broad-brushed, with contributions from production sectors as well as service sectors. However, the rapid growth in largely consumer-facing sectors recorded in Q1 was not sustained in Q2, and construction has struggled. It is anticipated that consumer spending will expand by 1.5% a year supporting GDP growth in coming years, and private services alongside the healthcare sector are set to drive longer term growth.

Future growth is forecast to be concentrated in and around Edinburgh and Glasgow (1.8% and 1.7%, respectively, between 2025-2029), with weaker prospects for the Islands and rural parts of the country. This is principally due to sector mix with private services expected to drive growth located in Scotland’s larger urban areas. A range of other factors that support economic development are also key, including working age population growth, skills, physical and IT infrastructure, and public and private sector investment. The inflow of Foreign Direct Investment (FDI) in particular is directly related to increases in labour productivity.

Aberdeen City and neighbouring Aberdeenshire are forecast to continue to struggle. Aberdeen is one of the few local authority districts in Scotland to have fewer jobs in 2023 than in 2010. During this time, it has lost nearly 18,000 jobs, equivalent to 10% of its workforce in 2010, largely due to the ongoing decline in the local oil and gas industry. During the same period, employment in Aberdeenshire expanded by 7%, only slightly below the Scottish average of 8%.

Between 2025 and 2029, the working-age population is expected to decline in 21 of Scotland’s 32 local authority areas, with decreases most pronounced in some of Scotland’s rural and island areas, including Eilean Siar (-0.9% per year), Dumfries and Galloway (-0.7%), and Argyll and Bute (-0.7%). However, this is not just a simple mainland vs. islands or rural vs. urban story. Inverclyde, part of Glasgow City Region, is expected to experience one of the highest rates of working population decline of 0.75% a year between 2025 and 2029. North Lanarkshire and South Lanarkshire, similarly, form part of the City Region and are also forecast falling working-age population.

ONS data suggests the rate of Scotland’s economic inactivity remains stubbornly high at 23.7%, 0.6% up on the previous quarter, and above the UK average of 21.8%. It is also almost 1% higher than for the same period a year previous. Reducing levels of economic inactivity is key to supporting long-term growth in Scotland and, indeed, the whole UK.

Productivity growth is expected to recover a little further, settling around 0.9%, while employment growth is set to slow to just 0.5% per year between 2025 and 2029. Both these elements are slightly weaker than the UK forecast, with sectoral and demographic factors at play.

The main headline from the UK government Budget remains to be the increase in taxes to fund day-to-day spending, principally the rise in employers’ national insurance contributions. The Scottish Government will announce their spending commitments and confirm the Scottish rate of income tax, which is already higher in Scotland for incomes above £26,562, on 4 December.

The Scottish Business Insights and Conditions Survey (BICS) survey shows 35% would absorb higher employment costs within profit margins and 8% of Scottish businesses said they would reduce spending on investment. However, firms will also likely cut employment costs by slower pay rises and lower headcount.

The same survey showed 16% of businesses would reduce employee numbers, and 9.4% said they would reduce wage increases. The approach to adapt to higher contributions is likely to vary across different sectors of the Scottish economy and, typically, lower paying sectors, such as accommodation and food, said they are more likely to reduce headcount and pay to adapt than the economy wide average.

EY Scotland Managing Partner Ally Scott said: “Our forecast shows economic growth is fragile and highly sensitive and we’re already aware organisations have found themselves in a bit of a quandary since the UK Government Budget on policy changes like increased employer NIC costs.

“This poses a number of challenges. Pass-through these costs fully, there’s a risk of fuelling higher inflation, which impacts confidence levels and could keep interest rates higher for longer – generally not seen as good for attracting investment.

“Apply the lever of lower wage rises and you hit the pockets of employees already feeling the strain on bottom line pay from the differentiated Scottish rate of income tax, which could have knock-on impacts to key lifestyle choices in the future, such as access to mortgages. Take it on the chin, change nothing and accept a lower profits environment then there’s less cash for investment, reinvestment, transformation and innovation impacting business competitiveness.

“A conundrum, to say the least, and a set of circumstances many clients and business leaders are struggling with. While our forecast doesn’t have these answers, ahead of the Scottish Government’s Budget it does amplify the need for policies that encourage a pro-business platform that helps restore economic growth.”

Sue Dawe, EY Scotland managing partner for financial services, said: “While our 2024 forecast now looks to be weaker than last quarter, we continue to expect low inflation, continued recovery of household budgets and rising consumer spending to support growth.

“However, growth prospects vary greatly across local authority areas, partly due to sectoral differences but also down to factors such as infrastructure, inward investment and demographics.

“Population growth remains a key concern for Scotland’s longer-term progress – particularly our working-age population, which is forecast to decline in 21 of Scotland’s 32 local authority areas in the next five years. High levels of economic inactivity has been identified as a drag on growth, with inactivity rates higher in Scotland than the wider UK.

“The Scottish Government will have many decisions to make on key priorities ahead of the Budget, but what our forecast shows is that fast action is needed to overcome barriers to economic growth and forge a competitive advantage for the Scotland’s business sector.”